Blog LenderLaw Watch September 16, 2020

California Legislature Passes Bill Expanding Consumer Financial Protection Oversight

On August 31, 2020, the California Legislature passed Assembly Bill No. 1864 (AB-1864), sending the bill to California Governor Gavin Newsom for his expected approval.  Below is an overview of some of AB-1864’s key provisions.

As LenderLaw Watch reported earlier this year, Governor Newsom’s 2020-2021 Budget Summary proposed expanding the state’s oversight of consumer financial services.  With the legislature having advanced the bill to the Governor, California is now one step closer to transforming the state’s current regulator into what has been dubbed a “mini CFPB.”  In fact, one of Governor Newsom’s stated reasons for the proposed legislation was “to cement California’s consumer protection leadership amidst a growing financial crisis and the consumer-protection retreat by federal agencies, including the Consumer Financial Protection Bureau [(CFPB)].”  He was concerned that the “fragmented oversight of financial services has left consumers vulnerable to abuse.”  This concern has now been further exacerbated by the current financial crisis caused by the COVID-19 pandemic.

AB-1864 provides that the state’s current financial services regulator, the Department of Business Oversight (DBO), will be renamed the Department of Financial Protection and Innovation (DFPI).  The new DFPI will have expanded examination and enforcement resources, including the authority to enforce California laws relating to “persons offering or providing consumer financial products or services” in the state.  DFPI will also have the authority to bring a civil action or other proceeding pursuant to 12 U.S.C. § 5552 to enforce the Consumer Financial Protection Act (12 U.S.C. § 5481, et seq.) with respect to any entity that is licensed, registered, or subject to the agency’s oversight.

AB-1864 also contains the new California Consumer Financial Protection Law (CCFPL), designed to “protect California residents from financial abuses in the marketplace for financial products and services.”  The legislative findings, among other things, explicitly seek to protect consumers from unfair, deceptive or abusive acts and practices, as well as promote nondiscriminatory consumer-protective innovation in consumer financial products and services.  They note that technological innovation “offers great promise” to the provision of consumer financial products and services, but “also poses risks to consumers and challenges to law enforcement in addressing those risks.”

The CCFPL makes it unlawful for covered persons or service providers to, among other acts, engage in unlawful, unfair, deceptive, or abusive acts and practices with respect to consumer financial products or services, or offer or provide a consumer a financial product or service that is not in conformity with any consumer financial law.  The CCFPL includes oversight of covered persons, broad enforcement and rulemaking authority, as well as the requirement of covered persons to register with the agency, pay registration fees, and make certain filings under oath.

“Covered persons” under the CCFPL include persons who engage in offering or providing “consumer financial products or services,” affiliates that act as service providers, and any service provider that engages in the offering or provision of its own consumer financial product or service.  However, the version of the CCFPL passed by the legislature contains several exemptions.  Notably, the CCFPL exempts national banks, California and other state-chartered banks, and existing DBO licensees other than payday lenders and student loan servicers.  The CCFPL also exempts licensees and their employees of any California state agency other than DFPI to the extent that licensee or employee is acting under the authority of the other state agency’s license.

The broad jurisdiction of the statute applies to entities that previously were not licensed by the DBO, and who previously were not subject to oversight by a primary regulator.  This may include certain fintech companies, debt collectors, credit reporting agencies, and other financial services providers who are currently unregulated or under-regulated.

Governor Newsom has until September 30, 2020 to sign or veto the bill.  If signed, as anticipated, the bill will take effect on January 1, 2021.  The DFPI envisions a three-year implementation of the CCFPL.  With California leading the way, other states could possibly follow suit in strengthening and expanding their consumer financial protection oversight and enforcement.  Notably, New York Governor Andrew Cuomo earlier this year proposed a similar regulatory expansion, including a proposed license requirement for debt collectors.